Broadband shouldn’t be one size fits all

With the Coalition’s alternative national broadband plan, Australia is finally focusing on a real issue – that there cannot be a ‘one size fits all’ approach and that competition has a role, writes Joshua Gans.

This week I will be speaking at a conference in Kansas City. Interestingly, the session I am participating in will be chaired by the mayor, Sly James. This is not usual for an economics conference, but when you see that also speaking at that session is Google’s chief economist, Hal Varian, it makes sense. This is because Kansas City was the first winner of Google’s contest to pick a city to install a fibre-to-the-home broadband network. And Mayor James is very pleased to be associated with Google.

A couple of years ago, localities all across the US were falling over themselves to get first in line for Google’s investment. Topeka, Kansas even renamed itself “Google”. One thing was for sure: thanks to competition, Google would face no local regulations in the way of rolling out Google Fibre.

The story of Google Fibre has important lessons for the economics of broadband. The most important element is that Google recognised that broadband is a local public good. When you install a more advanced broadband infrastructure, you cannot get the full benefits of it unless that installation takes place in local areas.

But it is that “last mile” which is both very costly and also has the greatest variation in costs from locality to locality. But, as Kansas City realised, each time you wire a locality, it is the local residents and businesses that benefit the most. In other words, as public benefits go, it has more in common with garbage collection and parks than it does with national defence.

The Australian Government, however, has gone the national route in broadband. That means that it wants very close to a ‘one size fits all’ model. Everyone gets fibre to their home. Everyone pays the same price. And no one gets more choices than another. Now, the economics have not allowed that goal – even the NBN rules this out for outlying regions – but nevertheless that is the aim.

For years, the Coalition resisted that. They avoided having a national approach and it cost them the last election. (Technically, everything cost them the last election). This week, that changed. The Coalition will now build a national network. It will be for everyone. And the prices will be the same. But they have abandoned the notion that everyone will get the same service. In other words, the economics will rear its head, and in most areas, the government will only build out fibre to the node.

That is actually a familiar policy; indeed, it was the policy that got Labor elected in 2007. But as Labor proposed it, it was insane. A government consortium would build the network to the node and then, effectively, Telstra would get the last bit into people’s homes. A monopoly is bad but two in sequence is worse. It was cheap in terms of capital, but expensive in that the capital would be effectively useless.

I wrote as much in 2008 when I argued for Plan B: for the government to build itself a national fibre-to-the-home network. Six months later, that is precisely what they proposed to do.

They did not, however, do what I had called for. I wanted the government network to be a competitor – to drive Telstra and others to enhance their network, boost up the cable network, and push fixed-line telephony costs to zero. The government could then subsidise heavily the areas where broadband was costly while relying on an open access model with private investment to cater to the last line.

I was basing this idea on a model proposed by Google’s Derek Slater and a collaborator, Tim Wu. Basically, the government would not so much build a network as cut through all the regulations and market power that were stopping a network from being built. Do it right, and it would be economical and move Australia forward. You would design a broadband market.

We know what happened. We got a Telstra break-up (which is a plus) but we ended up with an expensive old-style government monopoly in its place (a definite minus). And the prices people will pay will reflect that; not to mention the slow pace of the broadband roll-out.

Contrast this with Google Fibre. For $120 per month, you get everything. Internet, television, a digital video recorder and telephony. They even throw in a tablet. And you get it without download limits and 1 gigabit per second (10 times the NBN’s proposed rate) for both uploads and downloads.

The top of the line option from Google blows the NBN’s $90 per month out of the water. If you just want the internet you have two options: a $70 per month option without TV or a $0 per month option. The last one is interesting. It is slower (5Mbps) and involves a once-off fee of $300. If the Government was acting like a public good provider and actually like a Labor government, it would have a free option too. Then it could compel people to use it for government services and actually start saving money.

The Coalition, in their new embrace of national broadband, have not given us lots of details. Then again, neither did the Government. They hope to bring the retail broadband price below $70 per month, but you are going to get slower speeds. That doesn’t sound like a shiny future, so you can almost wonder why they are bothering.

As you read a little more carefully, there are glimmers of hope. With the Government having done the job of quashing Telstra’s long-term market power, the Coalition is looking to bring back competition. Rather than prohibiting cable providers from offering broadband, they are bring that back.

From my personal experience in Canada, you’ll get speeds in excess of 100Mbps with that alone. And moreover, you’ll get it sooner. Importantly, they will free up mobile competition because while the engineers don’t like wireless, real people seem to and we don’t want to cut that option off to preserve government monopoly profits.

The broadband debate in Australia has moved on. Finally, it seems that it will focus on a real issue – that there cannot be a ‘one size fits all’ approach and that competition has a role. None of this is at the level that would truly please an economist like myself. But for the moment, we should all appreciate a positive direction.

Joshua Gans holds the Skoll Chair in Innovation and Entrepreneurship at the University of Toronto and is a Research Fellow at the Center for Digital Business at MIT. He blogs on these issues atdigitopoly.org. View his full profile here.